“We will be closed for the time being”- the dreaded phrase for most SMEs operating in the service sector, their profitability dwindling alongside their customers. With the COVID-19 outbreak, SME firms (other than those providing essentials) are forced to close operations to slow the community spreading of the virus.

In Malaysia, SMEs play an important role in our nation’s economic growth. Firms shutting their doors indicate negative liquidity as most of them on daily cash flow, despite what limited spare funds they have at their disposal to cover immediate expenses. Further worries of uncertainty in the demand and supply chain plague them – “can we cope when the business reopens?” Firms might need to start aggressive promotions to attract consumers again, but will they be financially capable of doing so when we successfully win the war against COVID-19?

Our SMEs need financial support to weather this pandemic-induced economic downturn. For one, introducing additional tax reliefs could help with cash flow, albeit rather briefly. A more comprehensive solution is needed to solve the downwards trend in profitability.

Current governmental reliefs are:

  • The government has allocated RM100 billion to help various businesses and an additional RM10 billion for Small and Medium Enterprises (SMEs) under the Prihatin Rakyat Economic Stimulus Package.  Tax deduction on financing costs including interest expenses and legal expenses incurred on financing arrangements obtained by businesses between March 19, 2020 and Dec 31, 2020, provided the financing is used as working capital. Double deduction on interest expenses can be given to small and medium enterprises (SMEs).
  • Bank Negara Malaysia (BNM): Individuals & SMEs now automatically qualify for 6-month loan deferment, regardless of which bank they are customers of. Read the full details here.

The following are a few additional measures that the government could consider in providing solace:

  1. Lower Corporate Tax Rates – Lower rates or certain tax exemptions can be implemented for SMEs in the period of assessment (April to June 2020). This can be modified further by extending different rates to companies who do not retrench employees. How long this taxation should be implemented for would need to account for a reduction in government tax revenue. However, as Federal revenue is usually reserved for use of the nation’s development, our country may see this as a decision which involves sacrificing one of the two; nation development and front-line funds. Our government needs to avoid setting constraints on our front-lines due to lack of funds as we need to understand that we can only win this battle if we have enough resources at the front line. This is not the time to surrender to this pandemic.
  2. Tax Rebates – Tax rebates could be introduced for SME firms impacted during this period and rebates should be aligned to tax payment for the year of assessment (2019), which should be submitted this year. From this practice, maybe firms can enjoy some tax refunds which can be helpful for some of the firms for time being.tw
  3. Long-term loans – SMEs can be aided by the distribution of long-term loans with extensive repayment terms, accounting for the time needed to recover liquidity. For this, SMEs need to be transparent in reporting the losses they are facing due to this outbreak. Some SMEs worry that reopening after a pandemic means more expenses as they need to take care of rent and salaries without revenue just in, so cash from loans could be used to cover these expenses too.
  4. Cash-on-hand – SMEs need immediate cash to survive this pandemic. The stimulus package issued by the Malaysian Government caters to this need for immediate cash by offering loans to SMEs yet more emphasis should be given to this form of aid.
  5. Loan Repayment Assistance – The government can work with banks for hardship measures where SME firms can report their profitability level and remain monitored over until the repayment can be done when the firm gets back on its feet. Examples of such measures are:  freeze on interest, fee waivement, longer deferments, flexible payment arrangements, smaller settlements etc.
  6. Talk of the town draws to attention to the fact that the majority of the public believes that the government should reduce the rate of employment tax for the time being. Rather than reducing taxes for those who are still employed, introducing mechanisms for those who are unemployed due to the COVID-19 pandemic does seem like a better solution.

To all the SMEs, aside from worrying about the future, maintaining physical and mental well-being should be at the top of the list. SMEs might use this Movement Control Order (MCO) period to draft proposals with suppliers to come up with new terms of supply and payment to suit a win-win situation during this difficult period.

“Working from home is never the same as working at my office, but we have to maximize whatever time we have. We can use this MCO to do some research about where we stand in the market and do some market sizing activity,” said Chitesh Roshan, Manager of a car advertising portal. He also stresses that he is drafting a Plan B, to be prepared if something similar were to happen again.

SMEs that do not rely on physical spaces can also use this opportunity to explore online services and use this period to redesign promotional strategies to tackle the market once the Movement Control Order has been rescinded. MCO could create an opportunity for SMEs to brainstorm on how they can diversify their business platform in the future.

The World Bank’s GDP growth forecast for Malaysia in 2020 has been slashed from 4.5% to -0.1% on the assumption that the current large-scale disruption of economic activities would continue for most of the year before a partial recovery towards the year-end. Effective economic relief, particularly for vulnerable households and businesses, will depend on the ongoing PRIHATIN Economic Stimulus Package. But we can’t afford to stop there. We have an opportunity to go further; to align with our nation’s taxation policy—the redistribution of wealth,  to shift our economy towards greater sustainability by implementing a thorough economic policy response to weather the longer ravage of economic disruption.


Note:

Small Medium Enterprises (SME) are organizations with the following criteria:

  • Manufacturing sector – firms with sales turnover not exceeding RM50million or number of full-time employees not exceeding 200
  • Service and other sectors – firms with sales turnover not exceeding RM20 million or number of full-time employees not exceeding 75

Researcher: Kavitha Arunasalam, Malaysian Taxation and Accounting Lecturer; and Program Leader for Diploma in Accounting programs from Asia Pacific University of Technology and Innovation (APU)

Editors: Vikky Beh and Stella

Download article: Can-SMEs-afford-to-remain-optimistic.docx

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